LIFO and FIFO methods: how to optimise your stock management?

What is stock management?

Stock represents all of a company's goods, component parts, and raw materials. Acquiring, holding, and writing down that stock all carry a cost.

Stock management — covering all procurement and replenishment procedures — must therefore be sound to ensure the long-term viability of your business. There are several ways to manage stock on the shop floor.

Let us look at some of these optimisation methods.

The FIFO method: first in – first out

The FIFO method (First In First Out) holds that a company releases the assets it acquired earliest before all others.

In other words, goods are issued from stock in the same order in which they entered it.

FIFO: an asset for shop-floor logistics?

FIFO offers a straightforward approach to stock sequencing. It reflects current market prices and aligns with standard business practice — all the more so because, unlike LIFO, it is permitted by the French tax authorities.

It does, however, require a suitable storage method. Warehouse storage must be managed rigorously, following the designated flow of goods in and out.

It does not account for fluctuations in product value over time and can therefore lead to calculation errors.

As the drawbacks of FIFO remain minimal, it is widely favoured by businesses.

The LIFO method: last in – first out

The LIFO method (Last In First Out), by contrast, holds that a company releases the most recently acquired assets first.

In other words, goods are issued from stock in reverse order of arrival — the opposite of FIFO.

LIFO: an advantage during periods of inflation

Less intuitive than FIFO, LIFO should be applied in warehouses holding homogeneous products that do not depreciate. It is considerably harder to implement, given that it is prohibited by the French tax authorities and does not necessarily provide a precise valuation of remaining stock.

Nevertheless, businesses may find it worthwhile to draw on its principles when optimising their stock management.

Indeed, this method accounts for potential price fluctuations over time and can therefore be particularly useful during periods of inflation.

Adopt the stock management approach that suits your business!

In addition to FIFO and LIFO, there is also the FEFO method — First Expired First Out — which is particularly relevant for managing stocks of perishable products.

By taking a broad view of the various stock management methods, you can select the one that best fits your business.